The comparison of Chinese filings and U.S. SEC filings from U.S.-listed Chinese companies has become a hotly discussed topic over the past several weeks. A large number of articles, most notably from authors with short positions in the stocks discussed, focus on severe discrepancies between SAIC reported numbers and SEC filings, and conclude there must be fraud involved. Such an automatic conclusion is just plain wrong as there are many legitimate reasons for those numbers not to match.

With this article I am going to clarify some of the major aspects in this rather complicated system of multiple filings for one and the same U.S.-listed company. The article is based on a July 12 report from Roth Capital Partners (many thanks for supplying it for this purpose), several other reliable sources, and my own research.

Every U.S. listed Chinese company with actual business operations in China has to file financial statements with three agencies (there are more but those don't matter here): The U.S. Securities and Exchange Commission (SEC), China's State Administration of Industry and Commerce (SAIC), and the Chinese State Administration of Taxation (SAT). Let's have a more detailed look at those Chinese agencies:

China's State Administration of Industry and Commerce (SAIC)

The SAIC (http://www.saic.gov.cn) is primarily responsible for business registration, business licenses and acts as the government supervisor of corporations. The SAIC is the Chinese government registrar for official documents like articles of incorporation, legal persons, registered capital and company ownership. In order to renew their annual business licenses, all Chinese companies must file a so-called 'Company Annual Inspection Report' with the SAIC between March and June every year. This report includes financial statements such as balance sheet and income statement, but those numbers are not verified or audited by the SAIC. The agency is primarily concerned with legal compliance issues and not with operating data or taxes.

State Administration of Taxation (SAT)

Chinese companies pay a variety of taxes as VAT, Enterprise Income Tax (EIT), business tax and payroll taxes. The tax filings made with the SAT (http://www.chinatax.gov.cn) are much more similar to SEC filings than what has to be submitted to the SAIC for business licenses. The SAT requires audited financial data including balance sheet, income statement and cash flow statement and the tax bureaus audit those reports quite frequently themselves and fine offenders who under-report to the SAT. Tax collectors in China are not any less serious than those in Europe or the United States. Financial statements to the SAT are much more reliable than SAIC filings, however those are not publicly accessible and unavailable to investors or research analysts.

Reasons for non-matching SAIC/SEC Numbers

There are several legitimate reasons for SAIC reported financial statements not to match those numbers filed with the SEC. First of all, the SAIC is the business registrar and not the Chinese equivalent of the SEC. The SAIC does neither review nor audit financial statements submitted with the annual inspection report. Most companies see the sole purpose of an SAIC filing in getting their business license renewed, and some even hire a third party to do the filing for them. China Marine Food (CMFO) CFO Marco Ku explained that in a recent interview with Zack Buckley:

It is tedious to file with the government. They need to supply documents, ask for specific things, and it is very difficult. Most companies try to use an agent firm to file these with the government. I didn't do it myself when I ran my personal business based in Beijing some years ago because it is too tedious to do all the filing. If you pay an agent it can be done without headache in a few days. CMFO used an agent, paid a fee and got the business license done. In the process, the agent doesn't care whether you earn how much or whether you lose money. They just care whether your company is in operation. The agent firm doesn't ask us for audited reports. We pay the fee and get the license back. When I realized that the public can somehow access SAIC documents, we immediately asked my team to do the filing on their own instead of agent firm.

Another reason is the difference in accounting principles. Chinese documents are audited under PRC GAAP, while SEC filings are based on U.S. GAAP standards for financial reporting. There are many differences between those standard, starting with how revenue is recognized. I can't get into detail here but the bottom line is that certain key numbers don't have to be the same in order to still both be correct.

Roth Capital points out several other possible reasons for divergent filings:

Business Consolidation: In China every legal entity has to file its own annual inspection report with the SAIC. This includes every individual division or subsidiary of the U.S.-listed company and a separate report from the parent company. Sometimes the parent report is consolidated while other times it is not. According to Roth, inter-company transactions might be treated differently than in the U.S.: "For U.S. GAAP purposes, inter-company transactions are treated carefully to avoid double counting. However, for PRC tax purposes, PRC tax professionals may seek to use inter-company transactions in ways to minimize tax. This includes using different consolidation approaches and/or using inter-company transactions to allocated profits to entities that are subject to lower tax rates (including Hong Kong companies or PRC entities that have special tax benefits)."

Overseas Activities: SAIC filings only reflect business activities in the PRC while filed reports with the SEC have to reflect worldwide financial data for the consolidated U.S.-listed company. Revenue that is generated overseas or assets held outside of the PRC (even Hong Kong) will not be included in the SAIC filings. Another good example for the effects is that cash that a company keeps on U.S. bank accounts to pay for overseas expenses might not show up on the balance sheet submitted to the SAIC.

It can't be denied that many Chinese companies try to under-report their net profits to the authorities. Roth Capital concludes that "companies often find ways to reduce PRC taxable net income through various means, including aggressive practices." Another reason for understating financials with the SAIC is to avoid disclosing their real operating size to customers, suppliers and competitors. There, Chinese companies are not any different from those in America or Europe, why should they be?

Conclusion

Non-matching PRC and U.S. financial statements do not automatically point to errors, mis-statements or even fraud, as many of the circulating articles on this subject try to make you believe. In fact, in most cases they do not. The key here is the company's independent public accounting firm, that is responsible for the SEC filings. The auditor is responsible for reconciling U.S. filings with the SAT tax filings in China. The amount of taxes paid in China are a U.S. GAAP expense and if the auditor has reviewed the Chinese filings and determines that there is an underpayment of tax, they will require the company to record a tax reserve on the balance sheet filed with the SEC.

I do fully agree with Roth's conclusion that a high quality auditing firm with a great level of experience in China and with Chinese accounting should be one of the key criteria for making any investment decision in U.S.-listed China small caps. While I acknowledge that audit expenses for an early stage Chinese firm with limited business and profits should be contained at a reasonable level, I am convinced that with growing revenues and net profits every Chinese company should consider appointing a top tier auditor, and those who have not done this should be approached with more caution by investors. Roth Capital Partners:

"Severe discrepancies between U.S. GAAP reported income and PRC reported income and tax should be immediately apparent to the U.S. GAAP auditor, particularly those with extensive experience in China. We believe this experience is a critical consideration when evaluating companies as potential investments. We place most confidence in auditors with a high-level of experience in China, including a strong China-based team. While many U.S.-listed Chinese companies start out with less established auditors, we believe the highest quality companies migrate to more experienced auditors over time. We believe that retaining a small, inexperienced auditor year after year should be viewed as a risk factor and evaluated accordingly. "

Here at Trading China you will find the auditors of all companies we are tracking on their Score Cards. There is also a full list of auditors available. The list doesn't mean to imply that all those auditors not ranked in the Top 10 (or Top 100) are bad or less trustworthy, many of them might do a fantastic job, however it can be safely assumed that all the top tier names have extensive experience in China and a large number of partners, a reputation to lose, a strong China team, to deal with all those questions in the best of interests for the company and investors worldwide.

Longwei Petroleum (LPH) is currently trading at $2.22, down 17.78% for the year and down 28.39% from its April 13 high at $3.10. The Trading China Tracker Score is 8 (Buy).

Longwei has finally uplisted to Nyse Amex last week. On July 9 the company announced 11-month data for their FY 2010 ended June 30 and reaffirmed that full year performance will exceed its earlier guidance of $40.3 million adjusted net income. If we assume a performance for June 2010 similar to April and May, Longwei should report full year net income of about $44 million and EPS of $0.39. FY 2011 guidance currently stands at $73 million net income with growth expected to be 66% from FY 2010 numbers.

We have to keep in mind that the fully diluted share count, according to the latest investor presentation, stands at 112.2 million. In this presentation the company uses a lower share count to reach their FY 2011 EPS guidance of $0.71 - to be on the safe side here I am calculating only with $0.65 EPS for $73 million net income. Though I wouldn't be surprised if Longwei revises those numbers upwards by about 10% with their next earnings report.

Using the $0.65, LPH is currently trading with a P/E ratio of 3.4, which is ridiculously low for an Amex stock. One reason might be the complicated capital structure with preferred stock (12.5 million shares) and warrants (13.5 million shares with $2.255 conversion price) leading to an unreasonably high share count and plenty of sellers holding down the stock price. On Wednesday 1.45 million shares were traded, the highest volume since March, but the stock was up a measly 6% for the day and has retreated since to pre-uplisting levels.

It would be a good advice for the company to bring down the share count to a reasonable level in the 15-25 million range. As long as this doesn't happen I don't see the stock trading at multiples according to its growth. However, with 66% projected EPS growth for the current fiscal year and a booming industry (diesel and gasoline distribution), Longwei should trade at much higher levels. My 12-month target for the stock would be $4, based on 6x 2011e EPS of $0.65, with significant upside from a possible simplified capital structure.

China Green Agriculture (CGA) is currently trading at $11.19, down 23.88% for the year and down 33.20% from its March 9 high at $16.75. The Trading China Tracker Score is 4 (Hold).

CGA filed a huge $200m shelf on Friday after the close. The company has already diluted shareholders by 44.66% in the past 12 months and currently 26,848,259 shares are outstanding. It is unclear why this shelf offering has been filed, the company should have plenty of cash on its books as it reported $58.2 million cash and cash equivalents with the last quarterly filing and paid only a portion ($8.8 million) of the recent Guafeng acquisition in cash.

The acquisition price for Guafeng seems cheap at just 2.7x 2011 projected net income, however there is a chain of potential problems attached to this endeavour. Guafeng's estimated 2011 performance is $88.4 million in revenue and $10.6 million in net profit after tax for a net margin of 12%. China Green reported 9-months revenues and net income of $35.9 million and $15.3 million for a net margin of 42.6%. Common sense says that integrating a company much bigger than itself bears significant risks, especially when both businesses are not entirely compatible. But what might turn out to be an even bigger problem is that all of CGA's margins will collapse in FY 2011. The combined company should have net margins in the 20-25% range, down from 42.6% for old CGA.

Of the four analysts following China Green Agriculture, three give the stock a NEUTRAL rating and only Roth Capital still has a BUY on it with a $15.50 target. Brean Murray adjusted their models for CGA after the acquisition, now predicting a 24% net margin for 2011 and EPS of $1.42, leaving FY 2010 EPS estimates unchanged at $0.91. This means the stock is currently trading with a 2010e P/E-ratio of 12.3, which is much higher than most of its China small cap peers. Given the integration risks and possible dilution risk from the shelf offering I would avoid CGA and focus on much better opportunities in the beaten-down China space.

Let's have a look at the leading indexes in the U.S. and China and what has happened so far this year:

The S&P 500 is currently down for 2010 by 1.12%. It started the year at 1115.10, printed the year's low on July 1 at 1010.91 and recovered since to 1102.66, a gain of 9.07% from the low of the year. For the week that just ended, the S&P 500 gained 3.55%.

The leading Chinese index, Shanghai Composite (SSE), started the year at 3277.14, dropped all the way to 2319.74 on July 2 and bounced back to 2572.03 on Friday. The SSE is still down a remarkable 21.51% for this year but has recovered by 10.88% from the July lows. For the past week the Shanghai index outperformed the S&P 500 with a weekly gain of 6.10%.

Last week was a significant one for the Shanghai market. The weekly rise was the biggest since December last year and the benchmark index climbed for five consecutive sessions to leave the year's low behind by almost 11%. Both the U.S. and Chinese market reached their lows at the same time, however Shanghai has clearly outperformed the S&P 500 for the week and for the third quarter. Still, while the U.S. markets are now almost flat for the year, the Shanghai Composite is still more than 20% lower at this point.

Many analysts regard the drop in Chinese share prices as a buying opportunity now. BNP Paribas, Nomura and Morgan Stanley are expecting a rally for the Chinese market with Morgan Stanley analyst Jerry Lou predicting the Shanghai Composite might climb to 4,000 by June 2011. That would be a 55% gain from current levels.

I am tracking the performance of U.S.-listed China stocks with the Trading China Main Index (TCM). This index holds the 40 largest China-based stocks on senior U.S exchanges (Nyse, Nasdaq, Amex) with a market capitalization below $1 billion and positive net income. The TCM is currently at 880.51, down 11.95% for the year, and reached its low on July 6 at 772.04. Due to a market holiday on July 5 and the preceding weekend, July 6 was the trading day right after the Shanghai Composite marked its year low.

Since July 6 the Trading China Main Index has gained 14.05%, and for the last week alone it climbed by 9.16%, clearly outperforming both S$P 500 and Shanghai Composite. A weekly gain of more than 9% for U.S.-listed China stocks is significant, we haven't seen such a performance in a long time. Many of the better-known names on the index are up 15-25% for July: L&L Energy (LLEN) 25.11%, VisionChina Media (VISN) 23.00%, China MediaExpress (CCME) 22.00%, Yongye International (YONG) 19.30%, A-Power Energy (APWR) 17.83%. However, those gains could be just the start of something big as most stocks are still down heavy for the year. Leading wind energy play A-Power started the year at $18.29 and despite the 17.83% gain for July the stock is still available at a 54.13% discount - or in other words, it would have to double from here just to reach the level of December.

I believe there is a good chance that we have seen the worst levels of the year, both for the Shanghai Composite and for U.S.-listed China stocks. Even if you don't believe in Morgan Stanley's ambitious 55% gain for the broader Chinese market within one year, it seems quite likely that China will outperform the U.S. markets from here on. And if that happens, if the current trend is confirmed over the next few weeks, then we should see significant gains in quality Nyse/Nasdaq-listed Chinese stocks for the remaining five months of 2010.

Shanghai, the leading stock market in mainland China, is on the verge of breaking the months-long downtrend. The Shanghai Composite Index has appreciated by 10.5% from the lows in early July and with rising volume it could be up for something big. U.S.-listed China small caps have also stabilized here with the big board China names performing better than the general U.S. markets in the past few days.

There is a good chance that momentum will find its way back to China stocks in the second half of 2010. I have picked four stocks that should benefit from such a scenario and outperform the sector into 2011. You can buy all four stocks for a 2010e P/E-ratio of less than 5, and they all have no exposure to exports (currency risks) and troubled industries as steel or real estate.

Skystar Bio-Pharmaceutical (SKBI) is currently trading at $6.00, down 40.60% for the year and down 49.80% from its March 31 high at $11.95. The Trading China Tracker Score is 9 (Buy).

SKBI is a Chinese producer of feed additives, animal health medications and vaccines. The company is on track to achieve EPS of $1.35 for the current year and analyst estimates for FY 2011 go from $1.64 to $1.75 for 25% EPS growth. The stock is currently trading at year lows with a 2010e P/E of just 4.5. Both Hudson Securities and Rodman & Renshaw have the stock BUY rated with price targets of $14 and $15.

Universal Travel Group (UTA) is currently trading at $5.99, down 40.93% for the year and down 45.10% from its March 5 high at $10.91. The Trading China Tracker Score is 10 (Buy).

UTA is an online travel service, selling plane tickets, hotel reservations and packaged tours in China. The company's guidance for the current fiscal year calls for EPS in the $1.35-$1.40 range which leaves the stock with a P/E ratio of just 4.3. Current weakness can be attributed to a cut in ticketing commissions by the big Chinese airlines, which might have an impact of 10-15% on UTA's bottom line. Brean Murray rates the stock a BUY with a $12 price target, already accounting for lower commissions.

ZST Digital Networks (ZSTN) is currently trading at $4.57, down 47.84% for the year and down 55.98% from its March 12 high at $10.38. The Trading China Tracker Score is 7 (Hold).

ZSTN is a supplier of IPTV devices to cable system operators in China. The company reported a disappointing first quarter - the reason why the automatically generated Trading China Score is only at 'Hold' level - but reiterated full year guidance of $13-15 million net income for 2010. That calls for EPS of $1.15 this year and a current P/E-ratio of 3.9. Rodman & Renshaw believes EPS will rise by 32% to $1.52 in 2011 and rates the stock with OUTPERFORM and a $14 price target, which means ZSTN has more than 200% upside from current levels.

Telestone Technologies (TSTC) is currently trading at $9.31, down 53.08% for the year and down 58.07% from its February 23 high at $22.20. The Trading China Tracker Score is 10 (Buy).

TSTC is a supplier to the telecom industry in China, customers are the three large nationwide networks. The stock is under heavy pressure since the March filing of a $150 million shelf offering. However, it is very unlikely that more than a small portion of this sum will be raised anytime soon, with a chance of the company withdrawing the whole shelf. Checks indicate that TSTC doesn't need to raise equity to fund operations or for working capital needs. TSTC is expected to generate EPS of $1.90 this year and grow EPS by 35% to $2.57 in 2011. The stock is currently valued with a P/E of 4.9 and Roth Capital rates it a BUY with a $20 price target.

Huifeng Bio-Pharmaceutical (HFGB) is currently trading at $0.70, down 24.74% for the year and down 50.00% from its May 4 high at $1.40. The Trading China Tracker Score is 9 (Buy).

Huifeng is a leading Chinese producer of diosmin and rutin, raw materials for the pharmaceutical industry. Huifeng products are sold in China, France, Japan, Hong Kong, Russia, India, Germany and the U.S. and the company has a five-year $56 million diosmin supply contract in place with a leading French distributor. For FY 2009 the company reported earnings per share of $0.15 on 25% higher revenues and significantly improved net margins.

The company sees strong growth ahead for 2010 and the years to come. Official guidance calls for revenues to rise by 60% this year and for net margins to improve further to the 22%-23% range. 2010 EPS should come in around $0.20 due to a higher share count. There is a high risk of further dilution in 2011/12 as the company plans to make several strategic acquisitions and to aggressively pursue the patent drug market. Entering this market will transform the company from an input supplier to a patent drug developer.

Huifeng plans to raise $15-20 million dollar to acquire patent medicine factories and for the construction of a new diosmin plant. With this funding the company expects revenues and net income to more than triple in the next three years. However, I would not expect such an equity raise before Huifeng has successfully uplisted to a senior exchange - the company is actively progressing this plan and a reverse split will likely precede execution.

At the current price of $0.70 Huifeng shares are valued at 3.5x this year's earnings. In a normalized market for China small caps a P/E multiple of 7 should be easily achievable, which leads me to believe that the stock will revisit its May high of $1.40 within the next 12 months.

Jade Art Group (JADA) is currently trading at $0.36, down 47.06% for the year and down 66.98% from its April 5 high at $1.09. The Trading China Tracker Score is 15 (Strong Buy).

Now this is an interesting story. Back in 2008 this stock was trading safely in the $2-$7 range, just to collapse in early 2009 and stay below $0.30 for most of the year. Last fall trading in JADA shares became highly erratic with huge price swings to both sides, culminating in a massive run up from $0.36 to $1.09 within just two weeks this April. And now for the past 3 weeks we find JADA below $0.40 again, trading on low volume and having lost all momentum.

However, Jade Art Group finds itself in a much improved financial position now. With a current market capitalization of $28.8 million, the company is sitting on $14.5 million pure cash, if we add account receivables we even get to $20.5 million. The company posted earnings of $0.09 for the past two quarters and operating cash flow looks even better with $0.16 per share for the past six months. The company has no debt and a 50-year contract to access a huge mountain of jade on favorable terms.

The company tries to put some of its cash to work by searching for a complementary acquisition. Last November it transfered $8.8 million to a Shenzen-based investment group to identify a possible target company, the results of this endeavour are expected to become clear by August 14 this year. The strategy of diversifying its business seems crucial for JADA as right now the company has only one supplier and five customers, the risks associated with such a fragile business structure should not be underestimated (government regulation, natural disasters, weather conditions, competition, jade market).

Acknowledging those risks, I don't believe JADA's business should be valued with a multiple higher than 5x this year's earnings. If I assume no growth in jade sales for the remaining quarters this year, the company should be able to generate $12 million net income in FY 2010. As operations are high margin and provide strong cash flow we should add the company's current pile of cash to our projections (5x $12m plus $20m cash) which gives JADA a fair value of $1.00 at this time.

I would be a buyer in the low $0.30's, a level that provided strong support in the past nine months. It seems very likely that the stock will regain momentum later this year on the next earnings release, the announcement of an acquisition, a recommendation focusing on the strong balance sheet, or just the company breaking their months-long silence again. This is a very speculative idea, high risk and low visibility, but with potentially huge rewards and that's why I am recommending it here.

China Energy Corporation (CHGY) is currently trading at $1.98, up 141.46% for the year and down 51.95% from its April 9 high at $4.12. The Trading China Tracker Score is 12 (Strong Buy).

CHGY filed their quarterly report last week with revenues and earnings pretty much flat from the first quarter. That was not very impressive as their first quarter is usually the slowest of the year and China Energy's coal business is closed for about two weeks over the Chinese New Year holiday. Coal revenues were higher by almost 1000% over the year due to the fact that their coal mine was partially closed in 2009. However, China Energy is well on track to reach their net income guidance of $17 million to $18 million for 2010, which translates into earnings per share of about $0.40 and a current P/E ratio of 5. The company has no analyst coverage at this point.

As of May 31, China Energy had a working capital deficit of about $18.7 million, but the company does expect to generate sufficient cash flow for their working capital needs. I would expect the company to get approval for listing their stock on Nyse Amex later this year, however it might be advised to bring down their high share count via reverse split and try to get listed on Nasdaq. There is no indication from the company that they were planning a reverse split, though.

On valuation I believe we should not expect multiples higher than 7 or 8 at this stage. My 12-month price target would be $3.00 based on 7.5x 2010e EPS of $0.40.

L&L Energy (LLEN) is currently trading at $9.61, up 48.99% for the year and down 35.55% from its April 7 high at $14.91. The Trading China Tracker Score is 8 (Buy).

L&L Energy pre-announced FY 2010 numbers last week with a 10-K filing expected for Monday or Tuesday. The company announced net income of $30 million on revenues of $109 million for the year and stressed that they have beaten their own guidance. A look in the Trading China archives shows FY 2010 guidance, released on October 9, 2009, for $28.1 million net income on $108.1 million revenues - so the actual numbers were higher but only by a very small margin.

Investors should focus on FY 2011 (May 2010 to April 2011) numbers now, and LLEN projects revenue of $218 million and net income of $46 million or $1.61 per share. This represents revenue and earnings growth of 95% and 56%, respectively, and does not include the impact of potential acquisitions. Using the $1.61 from the guidance, LLEN is currently valued with a P/E ratio of 6 which leaves plenty of space for share price appreciation.

I view LLEN as the most mature of the six China coal plays covered in this article, and I believe the stock will be able to support higher multiples than its peers for the time being. Shareholder communication is good and it has the highest market capitalization of those six. As a U.S. company it is less vulnerable to "China gloom and doom" campaigns, LLEN is one of the few remaining China-based stocks in the Russell 2000, and it has a history of trading in the group of China stocks that is picked up first by momentum traders.

L&L Energy has no analyst coverage and no price targets have been issued other than the $19.50 from their IR firm Red Chip. I believe those $19.50 are achievable, although I would see a P/E multiple of 12 as the high end what is reasonable for a coal mining stock. My price target on LLEN is $16.50 based on roughly 10x FY2011e EPS of $1.61 per company guidance.

Puda Coal (PUDA) is currently trading at $7.35, unchanged for the year and down 38.22% from its April 7 high at $11.90. The Trading China Tracker Score is 16 (Strong Buy).

Back in May, Puda Coal reported very strong numbers for the first quarter and confirmed that gross margins should remain strong throughout the rest of the year. The company is in the process of consolidating several coal mines and back in May management said it expects to receive the business licenses for the Pinglu and Jianhe projects by the end of June. The lack of such an announcement might indicate a delay or just PUDA's failure to disclose this information. In case of a delay it might turn out as a major negative for PUDA as local government decisions are widely unpredictable. So there is some caution advised with the EPS numbers that are floating around.

Brean Murray is covering PUDA and currently rates the stock a BUY with a $18 price target. The analyst's estimates call for 2010 EPS of $1.17 rising to $2.31 in 2011. Puda management said that a recent announcement by the China National Development and Reform Commission (NDRC) to curb price hikes in thermal coal would not have a major impact on the company's results. However, with the NDRC action and the uncertain path for consolidating those coal mines, I would like to reduce Brean Murray's estimates by 15% just to be on the safe side here.

My price target for the stock is $15.50 based on roughly 8x 2011e EPS of $1.95. I believe PUDA should be valued with slightly lower multiples than LLEN for higher execution risk, less consideration of shareholder interests in the past (past financings) and also a higher risk of further dilution in the months ahead. However, PUDA should have the highest upside from current levels in the China coal stocks group.

Sino Clean Energy (SCEI) is currently trading at $5.52, up 8.23% for the year and down 40% from its March 31 high at $9.20. The Trading China Tracker Score is 17 (Strong Buy).

SCEI (formerly SCLX on the OTC/BB) also reported very strong first quarter numbers with revenue and net income up 215% and 246% year over year. The company also guided full year 2010 numbers to be 128% higher than 2009. That is truly impressive growth with the additional benefit of excellent gross margins of 41.2%, up 10% from the year ago period.

What's holding the stock back is the $35 million S-1 filing from June, which was posted just a few days after the Nasdaq listing became effective. The company should be able to raise funds at $5 per share, so the secondary offering would have a size of 7 million shares which would mean about 40% dilution of Sino Clean's current shareholders.

For my estimates I will just assume the SPO goes through at $5. Back in May SCEI said it expects at least $105 million in revenues and adjusted net income of at least $25 million for FY2010. My EPS estimate for the year, including those 7 million new shares, stands at $1.15 which leads to a current P/E ratio of 4.8. For my price target of $8.75 I use the CHGY multiple of 7.5 as both companies are similar in size and market position. However, I would prefer SCEI over CHGY as soon as the secondary offering is out of the way.

SinoCoking Coal (SCOK) is currently trading at $13.28, down 9.05% for the year and down 75.28% from its March 5 high at $53.70 (no typo). The Trading China Tracker Score is -9 (Strong Sell).

This is by far the most speculative of the six coal stocks mentioned here. SinoCoking is currently constructing a new coking facility which should triple the company's current capacity and expand gross margins. The company also got government permission to acquire and consolidate other coal mines and has already identified 22(!) potential targets. All those projects will require enormous funds and it is very unclear when and if SCOK will be able to successfully raise such funds, and at what terms.

Another risk factor here is that the future pricing of coking coal is significantly less certain than that of thermal coal as the Chinese steel industry is currently under severe pressure and a good part of SinoCoking's projected growth will depend on the recovery of their major customer's businesses. And if that's not enough... SCOK stock is the most expensive off all six coal stocks with a current 2010e P/E of 10.5.

Rodman & Renshaw initiated coverage on SCOK yesterday with a NEUTRAL rating, calling the stock fully valued at the current time. I believe that is a very optimistic view as all those risks have to be taken into account. I wouldn't touch the stock as an investment at any price higher than $5, based on the fact that significant shareholder dilution has to be expected in the next 12 months and meaningful earnings contribution of the new coking plant is at least one year away.

Songzai International (SGZH) is currently trading at $5.00, down 38.35% for the year and down 55.56% from its March 8 high at $11.25. The Trading China Tracker Score is 0 (Sell).

Songzai - which plans to change its name to "U.S. China Mining Group" this month - is the laggard in the otherwise thriving China coal sector this year. Huge problems at their coal mine led to a year-over-year decrease in revenues of 40% and net income has collapsed by almost 80%. The company said that the current second quarter will be another "quarter of continued pressure" but it expects operations in the affected Xing An mine to return to normal in the third quarter of 2010.

SGZH has acquired a second coal mine this spring with resources of approximately 143 million metric tons. The company said that beginning operation in the third quarter of 2010 will deliver meaningful revenues from the new mine this year and upwards of $50 million in revenues during its first full year of operation in 2011.

There have been many bad surprises for SGZH shareholders in the past year which leads me to take a very cautious stance with all company announcements regarding future revenues and earnings. However, it looks like SGZH might be able to turn around its business in the second half of this year and 2011 projections should look much better. At this time it is not possible for me to come up with reliable FY2011 estimates or a price target, although I would not sell the stock at current levels.

With Second Quarter earnings in August we should hopefully get confirmation that the business will be back on track soon, and if the company wants their share price to recover they better release some numbers for the combined two mines that investors can work with. SGZH might become a strong buy after the next report with the Xing An mine back to normalized production, and the contribution of the new Liujiaqu mine setting the stage for triple digit growth in 2011.

China Redstone Group (CGPI) is currently trading at $3.70, down 43.94% from its April 14 high at $6.60. The Trading China Tracker Score is 10 (Buy).

China Redstone filed their annual report today, a conference call is scheduled for next Monday morning. The company did handily beat their FY 2010 guidance and posted earnings per share of $1.33 ($0.96 if we use the current share count of 13.5 million) with strong operating cash flow, especially in the fourth quarter.

The company is a cemetery developer in the greater Chongqing area, one of the largest cities in the world. Greater Chongqing is currently growing by half a million residents every year and the business of selling graves (don't want to sound morbid here) should be set for long-term growth with an annual mortality rate of 6.5/1000. Apparently it is also a Chinese belief that purchasing a grave prior to one's death is wishing for a healthier and longer life.

China Redstone, through their operating entity, Chongqing Foguang Tourism Development (about time to strip that 'tourism' off your name, folks) has big plans for the future.

In 2010, we plan to complete the first phase of land acquisition for the Gui Yuan II project and the construction of the cemetery and supporting facilities within the acquired land. We plan to develop 5,000 external tombs and 2,000 internal tombs. After the Gui Yuan II project is completed, our next focus will be the development of the Longqiao Lake project. In 2011, we plan to develop tourism, leisure, entertainment, dining accommodation, transportation and other comprehensive services and facilities. We plan to expand our seedling base in the Longqiao Lake area. Management believes that the funds for such short-term developments can be obtained through the sale of securities or issuance of debt instruments in addition to our retained earnings.

Foguang's projected income is approximately US$12 and US$16 million in 2011 and 2012, respectively, so Foguang expects to have enough funds for its short term development projects. Our long term development includes acquisition and merger with cemeteries locally or in other cities. We plan to acquire Shenzhen Huaqiao Public Cemetery in 2013. The funds needed for this acquisition is approximately US$29.33 million.

CGPI has only a very short history as a public company and there is a lot of work to do for the management, especially regarding internal controls and auditing. Official guidance that was released earlier this year calls for FY 2011 earnings per share of about $1.20, implying net income growth of about 30%. Uplisting to a senior exchange is not currently on the agenda, but the company states they "do not rule out the possibility of applying for listing on the NYSE Alternext or Nasdaq Capital Market or other markets" in the future.

We can not apply very high multiples to a company that is still in the early stages as a public company, but I believe the current valuation at roughly 3x this year's earnings doesn't do China Redstone justice.

China Runji Cement (CRJI) is currently trading at $0.11, down 54.21% for the year and 78.46% from its February 5 high at $0.51. The Trading China Tracker Score is -2 (Sell).

China Runji filed their quarterly report for the third quarter of fiscal 2010 today. With a current market capitalization of $8.66 million, trailing nine months net income of $660,000, operating cash flow of $10.12 million and total stockholder's equity of $26.5 million the stock is currently priced for bankruptcy.

Not everything in today's report looks hopeless. Gross profit increased by 400% over the year ago period on a 12% decrease in revenues, mostly as a result of cost control procedures. However, the big concern is still that huge working capital deficiency of $34.35 million which means all the financial statements had to be prepared on a going concern basis and the company is in dire need of financing. CRJI "anticipates raising funds through an equity or debt offering or with a strategic partner in the coming year," which seems almost impossible to do at the current deeply depressed share price. The company needs to raise funds to proceed with their ambitious plans:

We plan to construct a third production line in late 2010, which will have a daily cement clinker production capacity of 5,000 tons or 1.5 million tons annually. Upon completion, our total cement production capacity will reach 3.6 million tons per year, and cement clinker production will reach 3 million tons per year, controlling 30% of the market share within a 100 miles radius of our production facility.

This stock is a highly risky gamble on CRJI's ability to raise funds in the near future. It is unlikely that the stock will trade up to book value anytime soon, however the regional market position of Runji is strong and the company has the support of the local government.

China MediaExpress (CCME) is currently trading at $10.27, down 3.12% for the year and down 30.57% from its March 24 high at $14.79. The Trading China Tracker Score is 15 (Strong Buy).

This Monday CCME raised its 2010 net income guidance by 14.4% to a range of $82 million to $85 million (non-GAAP). The company stressed that this guidance "excludes the impact of any possible acquisitions, additional new buses, new revenue streams and any new investments in other media projects in 2010." Earlier this month the company got their first independent analyst coverage. Global Hunter Securities started the stock with a BUY rating and $18 price target. I believe the stock should be worth at least $21.50 based on roughly 10x this year's earnings. This would be in line with Global Hunter's target when factoring in the improved company guidance.

China Recycling Energy (CREG) is currently trading at $3.29, down 20.15% for the year and down 46.60% from its March 24 high at $6.16. The Trading China Tracker Score is 4 (Hold).

The company has reaffirmed its 2010 net income guidance of $18 million to $20 million, which would give earnings per share of about $0.40 for the current fiscal year. CREG's business model heavily relies on funding large projects with returns dripping in over the next 15-20 years. Operating cash flow looks much better than net income for the past few quarters. The only analyst coverage I could find is from small boutique firm Gar Wood Securities which upgraded the stock to BUY with a $6 target in mid-May. My 12-month price target for CREG stays at $5.50 but I would wait for a catalyst before starting a new position in this stock.

China Sun Group (CSGH) is currently trading at $0.84, down 54.84% for the year and down 51.45% from its April 14 high at $1.73. The Trading China Tracker Score is 8 (Buy).

Due to the company's irregular fiscal year, the next earnings we get from China Sun will be the annual report for their FY 2010 at the end of August. For the 4th quarter (ended May 31) the company said it expects approximately $11.0-$12.0 million in revenue and $2.0-$2.5 million in net income. Valuation is very low with a trailing P/E-ratio under 5. A problem might be that CSGH's independent auditor is ZYCPA, the same firm that got under pressure recently with the China Marine Food (CMFO) discussion. I am lowering my price target from $3.50 to 10x 2010 EPS or $2 to acknowledge that I don't have any visibility into FY 2011, mainly because the company fails to communicate with investors.

China Yida Holding (CNYD) is currently trading at $13.14, down 5.54% for the year and down 22.71% from its June 11 high at $17.00. The Trading China Tracker Score is 8 (Buy).

CNYD has achieved high revenue growth (110% in '08 and 67% in '09) and strong profitability (gross margin of 75% in '08 and 79% in '09). The trend in China with higher wages leading to more domestic consumption incl. travel will be on China Yida's side, and the company is aggressively purchasing new tourism destinations. The stock has survived the negativity regarding all China small caps mostly unharmed which might indicate that it could maintain higher multiples than its U.S.-listed Chinese peers in the future. My price target stays relatively high at $25, which is rougly 14x FY2011 earnings.

Biostar Pharmaceuticals (BSPM) is currently trading at $2.69, down 39.56% for the year and down 51.18% from its April 23 high at $5.51. The Trading China Tracker Score is 9 (Buy).

Biostar management provided guidance for fiscal 2010 for revenues of $80.0 to $82.0 million with net income of $18 to $20 million. The company started 2010 with a solid balance sheet, working capital of $24.1 million, and issued another bullish business outlook in May. There are no analysts covering Biostar Pharmaceuticals. The stock is currently valued at just 0.9x sales and 4.1x earnings for 2010 and my 12-month price target is unchanged at $7.80, based on 12x 2010e EPS of $0.65.

China Armco Metals (CNAM) is currently trading at $3.04, down 4.11% for the year and down 72.62% from its March 5 high at $11.10. The Trading China Tracker Score is 12 (Strong Buy).

Armco has repeatedly reaffirmed its financial guidance with revenues for the full year of 2010 exceeding $220 million with net income exceeding $12.0 million. The company stated "we are in the strongest financial position in our history and intend to put our capital to work to further fuel our growth." Operating cash flow in the first quarter of 2010 was $15.46 million, about one third of their total market capitalization. And growth is very likely to accelerate beyond 2010. Based on official company guidance, CNAM shares are currently valued at just 0.2x sales and 4x earnings, based on 15.9 million shares (including new shares issued in a private placement last April). There are no analysts covering the stock yet. My 12-month price target for CNAM is $11.25, based on 15x 2010e EPS of $0.75.

China Biologic Products (CBPO) has been holding up very well in this market. The stock is currently trading at $12.26, up 1.49% for the year and down just 14.75 from its May 19 high at $14.38. The Trading China Tracker Score is 8 (Buy).

China Kangtai Cactus (CKGT) is currently trading at $1.47, down 45.76% for the year and down 45.36% from its April 16 high at $2.69. The Trading China Tracker Score is 11 (Buy).

Kangtai is targeting revenue for the full year 2010 to be nearly $35 million, up over 30% from $26.5 million in 2009. Operating cash flow has been very strong with $7.75 million for 2009 and $4.53 million for the first quarter of 2010. There are no analysts following the stock and EPS estimates are difficult due to the complicated share structure and limited history of new business segments like cigarettes. I am using a cash flow per share projection of $0.45 for the year and a multiplier of 10 to reach my price target of $4.50 for the stock.

Trading in Orient Paper (ONP) shares has calmed down considerably after the company issued several press releases to defend itself against fraud allegations from Muddy Waters LLC. Orient Paper reaffirmed their 2010 earnings guidance of $0.98 per fully diluted share which gives the stock a P/E ratio of slightly above 7 at current levels. I want to point out that the stock is not exceptionally cheap here when compared to its peers in the U.S.-listed China space, and that neither of the two analysts that are following the company, Hudson Securities and Roth Capital, has issued a note yet to defend the stock after the big turmoil last week. ONP shares lost 4.7% of their value last week.

On Wednesday, China Green Agriculture (CGA) announced the closing of the Beijing Gufeng Chemical Products acquisition and said that this is expected to contribute EPS of $0.39 for FY 2011. While Rodman & Renshaw called the acquisition "attractive both financially and strategically," Brean Murray points out integration risks and expects "all margins to decrease significantly in FY11." All three analysts that follow the stock give it a neutral rating. CGA shares are up 10.1% for the week.

Several Chinese companies stepped up efforts to increase shareholder value by announcing a share buyback program last week. I believe this is exactly the right signal to the market now as most China small caps have lost at least one third of their value in the last three months. China-Biotics (CHBT) announced a $20 million buyback on Wednesday and China Medicine (CHME) a $2 million program on Friday after the close.

Also on Friday, Longwei Petroleum (LPIH) posted strong numbers for April and May and issued a bullish outlook for their 2011 fiscal year that started this month: "The Company expects continued favorable market and industry conditions to boost revenue growth and profitability in the first half of fiscal 2011." The stock gained 11.44% on Friday and is up 17.9% for the week. It is now trading safely above $2 and if LPIH can hold this mark for another four trading days we can expect the stock to trade on Nyse Amex as early as July 19.

U.S. listed China stocks fell completely out of fashion in the Second Quarter and the average stock lost about 20% in the three months from April to June 2010. Similar to the First Quarter, OTC/BB listed stocks again fared better than those listed on Nasdaq or NYSE. Several of the best known names in the sector like China Agritech (CAGC), Fuqi International (FUQI) or Rino International (RINO) lost half of their value and belong to the biggest overall losers in the U.S. markets last quarter.

There are many reasons for this carnage, from trust issues to short-selling hedge funds, a slew of secondary offerings, restatements, fear mongering about a China collapse and widespread fraud in the sector. However, the business outlook for most China names has not deteriorated. Instead it is still very positive, improved even for companies as China Armco (CNAM), Longwei Petroleum (LPIH) or Universal Travel Group (UTA).

Valuations in the China sector are extremely attractive with many solid players sporting a forward P/E in the low single digits now. It is only a matter of time until renewed interest in value investing and improved sentiment for Chinese stocks will bring the focus of investors back to fundamentals. For now, fear and uncertainty are clearly dominant and suppressed demand for China stocks might lead to lower lows in the near future.

Both China indexes are revised at the beginning of each quarter. Stocks that do no longer meet the requirements are being removed. Reasons could be posting a loss in the most recent quarter, uplisting to a higher exchange or just a huge decline in share price. Following is a list of all changes for both indexes.